Dollar Readies for Risk Trend Swells as Europe Tries to End Crisis
We have been waiting for a meaningful and consistent move in underlying sentiment against the backdrop of slow and listless markets for a week. We will certainly see activity levels pick up in the upcoming session. The real question is whether volatility translates into a true trend. Taking the temperature of risk appetite and the safe haven dollar in the lead up to the promising final 48 hours of this trading week, we find the same extreme measures of inactivity that has defined this week – maintaining its dangerously ominous tone. For favored risk benchmark (the S&P 500 Index) a fifth consecutive, narrow-range day was backed by volume well below the three-month average. At the other end of the spectrum, the extreme safe haven US dollar (prized for its liquidity) is carving out its lowest five-day average range (49 points for the Dow Jones FXCM Dollar Index) in many months. There is typically a quiet before the storm.
From this past session it is worth noting a modest pickup in activity and tightening of risk-centered correlations that surrounding a rumor that began with the Nikkei news agency that the G20 was considering a 600 billion euro program funded, through the IMF, meant to help the Euro-area fight its financial crisis. This report was quickly rejected; but the market’s reaction is telling when it comes to understanding exactly what topic and outcome can rouse the broader market trends. We should be fully invested in the European risks as dollar traders going forward – as surely as a trader of any other currency or asset class should have watched the US subprime market back in 2007/2008.
Over the medium to long-term, a tidy solution to the world’s largest collective economy (the EU) is unlikely and there is already a permanent stain on the Euro’s ability to stand as a viable alternativereserve currency to the greenback. However, risk appetite is fickle and the dollar’s position on the sentiment scale is extreme. A short-term boost in general risk appetite through stimulus and easing monetary policy out of Europe may undermine the general fundamental standing of the euro; but such moves also boost risk taking – and dollar selling.
Euro Traders Wait for the ECB to Announce Rate, Stimulus Decisions
The next and last 48 hours of this trading week will be dedicated to the euro. As we have seen a number of times before, the markets are counting off the last few minutes before policy officials have to show their cards and take a definitive stance on their ongoing crisis fight. The issue now is that this is the fifth attempt at developing a conclusive solution, the options are well known and market participants have reason to doubt nearly every practical solution. For the past week, the top concern has been the EU Summit scheduled to wrap up on Friday; but we should not overlook the influence of the ECB rate decision that lies directly ahead.
Markets are fully pricing in a 25 basis point cut that lowers the benchmark lending rate to 1.00 percent. Beyond that, we move into speculative territory. Given the precarious state of the European financial system and the general faith afforded to the bailout effort; a 50 bp cut should be entertained as a possibility (though swaps aren’t discounting it) and/or further cuts going forward (also, not priced in). Though we don’t discuss yields very often with global rates so low; the euro has nevertheless benefited significantly from its yield advantage over the US dollar since 2009. Given the similarity between the two currencies (exceptional liquidity, stimulus-driven, remarkable domestic earnings at the business level); the yield differential is a substantial boon. Should it deteriorate or disappear, it is easier to pay attention to the pressing risk balance.
Just as pressing (perhaps more so than the rate side of the equation) is the risk component of this event. Amongst the very few options available to the EU to announce as bailout initiatives is a bigger role played by the ECB (after Standard & Poor’s threatened downgrade to 15 EZ members, the EU, European banks and the EFSF should their exposure increase). An optimal scenario for fully bailing Europe out would see the central bank capable of buying unlimited government debt. New lending facilities would be next. Most probable: lowering collateral requirements.
British Pound: More Sympathy to Europe’s Central Bank than the BoE
Given the general fundamental interest traders will approach the markets with in the upcoming trading day, there may be high expectations afforded to the Bank of England rate decision. There shouldn’t be. Though there is an off chance they increase their bond purchasing program to front run a worsening European crisis or amplify efforts to stabilize the situation; they will most likely take a wait and see approach. More likely, the pound will be fully wrapped up in what the ECB can do for confidence and the Summit does for preventing the spreads of risk to the UK.
Australian Dollar Sees Another Volatile Response to Employment Data
If there weren’t a black hole of uncertainty surrounding the European financial system; the Australian dollar would have been exceptionally volatile this week (most likely with a substantial selloff). Feeding the bearishness that began with the RBA rate cut Tuesday, this morning brought an unexpected net loss of jobs. The Aussie dollar stumbled; but trend development was sidelined by the greater interest in risk trends.
Swiss Franc Parked Just Above 8-Month Low Ahead of European News Run
The Swiss franc is hovering just off of eight-month lows against the euro and nine-month lows against the dollar. As a safe haven for Europe, EURCHF will be heavily influenced by the next 48 hours; but the impact will be complicated by the SNB’s intervention actions/threats. For any other Swiss cross, the franc is looking much more like a euro dependent and less like an ideal safe haven.
We have been waiting for a meaningful and consistent move in underlying sentiment against the backdrop of slow and listless markets for a week. We will certainly see activity levels pick up in the upcoming session. The real question is whether volatility translates into a true trend. Taking the temperature of risk appetite and the safe haven dollar in the lead up to the promising final 48 hours of this trading week, we find the same extreme measures of inactivity that has defined this week – maintaining its dangerously ominous tone. For favored risk benchmark (the S&P 500 Index) a fifth consecutive, narrow-range day was backed by volume well below the three-month average. At the other end of the spectrum, the extreme safe haven US dollar (prized for its liquidity) is carving out its lowest five-day average range (49 points for the Dow Jones FXCM Dollar Index) in many months. There is typically a quiet before the storm.
From this past session it is worth noting a modest pickup in activity and tightening of risk-centered correlations that surrounding a rumor that began with the Nikkei news agency that the G20 was considering a 600 billion euro program funded, through the IMF, meant to help the Euro-area fight its financial crisis. This report was quickly rejected; but the market’s reaction is telling when it comes to understanding exactly what topic and outcome can rouse the broader market trends. We should be fully invested in the European risks as dollar traders going forward – as surely as a trader of any other currency or asset class should have watched the US subprime market back in 2007/2008.
Over the medium to long-term, a tidy solution to the world’s largest collective economy (the EU) is unlikely and there is already a permanent stain on the Euro’s ability to stand as a viable alternativereserve currency to the greenback. However, risk appetite is fickle and the dollar’s position on the sentiment scale is extreme. A short-term boost in general risk appetite through stimulus and easing monetary policy out of Europe may undermine the general fundamental standing of the euro; but such moves also boost risk taking – and dollar selling.
Euro Traders Wait for the ECB to Announce Rate, Stimulus Decisions
The next and last 48 hours of this trading week will be dedicated to the euro. As we have seen a number of times before, the markets are counting off the last few minutes before policy officials have to show their cards and take a definitive stance on their ongoing crisis fight. The issue now is that this is the fifth attempt at developing a conclusive solution, the options are well known and market participants have reason to doubt nearly every practical solution. For the past week, the top concern has been the EU Summit scheduled to wrap up on Friday; but we should not overlook the influence of the ECB rate decision that lies directly ahead.
Markets are fully pricing in a 25 basis point cut that lowers the benchmark lending rate to 1.00 percent. Beyond that, we move into speculative territory. Given the precarious state of the European financial system and the general faith afforded to the bailout effort; a 50 bp cut should be entertained as a possibility (though swaps aren’t discounting it) and/or further cuts going forward (also, not priced in). Though we don’t discuss yields very often with global rates so low; the euro has nevertheless benefited significantly from its yield advantage over the US dollar since 2009. Given the similarity between the two currencies (exceptional liquidity, stimulus-driven, remarkable domestic earnings at the business level); the yield differential is a substantial boon. Should it deteriorate or disappear, it is easier to pay attention to the pressing risk balance.
Just as pressing (perhaps more so than the rate side of the equation) is the risk component of this event. Amongst the very few options available to the EU to announce as bailout initiatives is a bigger role played by the ECB (after Standard & Poor’s threatened downgrade to 15 EZ members, the EU, European banks and the EFSF should their exposure increase). An optimal scenario for fully bailing Europe out would see the central bank capable of buying unlimited government debt. New lending facilities would be next. Most probable: lowering collateral requirements.
British Pound: More Sympathy to Europe’s Central Bank than the BoE
Given the general fundamental interest traders will approach the markets with in the upcoming trading day, there may be high expectations afforded to the Bank of England rate decision. There shouldn’t be. Though there is an off chance they increase their bond purchasing program to front run a worsening European crisis or amplify efforts to stabilize the situation; they will most likely take a wait and see approach. More likely, the pound will be fully wrapped up in what the ECB can do for confidence and the Summit does for preventing the spreads of risk to the UK.
Australian Dollar Sees Another Volatile Response to Employment Data
If there weren’t a black hole of uncertainty surrounding the European financial system; the Australian dollar would have been exceptionally volatile this week (most likely with a substantial selloff). Feeding the bearishness that began with the RBA rate cut Tuesday, this morning brought an unexpected net loss of jobs. The Aussie dollar stumbled; but trend development was sidelined by the greater interest in risk trends.
Swiss Franc Parked Just Above 8-Month Low Ahead of European News Run
The Swiss franc is hovering just off of eight-month lows against the euro and nine-month lows against the dollar. As a safe haven for Europe, EURCHF will be heavily influenced by the next 48 hours; but the impact will be complicated by the SNB’s intervention actions/threats. For any other Swiss cross, the franc is looking much more like a euro dependent and less like an ideal safe haven.